SC1862		
PAPUA NEW GUINEA
[IN THE SUPREME COURT OF JUSTICE]

SCA NO 106 OF 2018

BETWEEN
INFRATECH MANAGEMENT CONSULTANTS LIMITED
Appellant

AND
THE INDEPENDENT STATE OF PAPUA NEW GUINEA
Respondent

Waigani: Kirriwom, Makail & Koeget JJ
2019:  24th June & 1st November
 
SUPREME COURT – CIVIL APPEAL – Assessment of damages following entry of default judgment – Claim for contractual interest – Interest accruing on unpaid sum – Contractual interest distinct from statutory interest  - Contractual interest accrues on unpaid principal until date of judgment on damages – Judicial Proceedings (Interest on Debts and Damages) Act, 2015 – Section 4 

Facts 

This is an appeal against the decision of the National Court whereby following entry of default judgment and assessment of damages, refused to award interest on damages for breach of contract for provision of management consultancy services to the State. 

Held:

1.	Interest can be claimed as of right under an agreement to pay or voluntary under statute, the Judicial Proceedings (Interest on Debts and Damages) Act, 2015. Cheong Supermarket Pty Ltd & Ors v. Bougainville Enterprises Pty Ltd [1987] PNGLR 24 referred to.

2.	In the case where interest is claimed together with damages for breach of contract, it is sufficient to plead that interest is claimed under an agreement to pay and the relevant clause(s) of the agreement on interest in the writ to draw the opposing party to its contractual basis. 

3.	At common law any payment made by the defaulting party to a contract where interest accrues on the principal is towards settlement of interest and not principal: Bower v. Morris (1841) 41ER 525 applied.

4.	The appeal is upheld, decision of the National Court is quashed, and judgment is entered in the sum of K8,348,749.04 with 2% interest from the date of judgment on damages until final settlement.  

5.	The claim for contractual interest from 1st May 2011 to date of judgment on damages of 18th June 2018 is remitted to the National Court for retrial before another judge on a date and time to be fixed.

Cases Cited:
Papua New Guinea Cases

Cheong Supermarket Pty Ltd & Ors v. Bougainville Enterprises Pty Ltd [1987] PNGLR 24

Overseas cases

Bower v. Marris (1841) 41ER 525

Counsel:

Mr. I. Molloy with Mr. T. Injia, for Appellant
Mrs. R. Gelu with Mr. B. Tomaketo, for Respondent 

JUDGMENT  
1st November, 2019	

1.	BY THE COURT:  This is an appeal against the decision of the National Court of 18th June 2018 at Waigani in proceedings, WS No. 1467 of 2007 whereby following entry of default judgment and assessment of damages, refused to award interest on damages for breach of contract for provision of management consultancy services to the State.  

National Court Decision

2.	The contract was for a term of 2 years and value was K2,079,000.00.  The contract commenced on or about 7th April 2003 and was to be completed on or about 7th April 2005 but went beyond that date.  

3.	The State had referred the trial Court to paragraph 8 of the statement of claim and submitted that it had paid K2,865,619.12 out of K11,251, 270.34 due and claimed by the appellant.  It referred to all the invoices rendered by the appellant and payments made, particulars were as follows:

Date	   Amount	
17/12/2004	    73,417.12	
11/02/2005	  645,708.98	
  2/03/2005	  354,291.02	
28/09/2005	     92,202.00	
18/11/2005	1,400,000.00	
23/11/2005	   100,000.00	
  2/06/2006	   200,000.00	
Total To Date 	2,865,619.12	

4.	The appellant confirmed receiving the sum of K2,865,619.12 but contended that a further sum of K8,249,555.62 was outstanding and due.  The respondent said that there was nothing owing and further contended that it paid monies over and above what it owed to the appellant.  The outstanding issue then in the trial Court was whether there was still some money outstanding and due and if so, how much.  These issues became the centre of arguments between the parties.  

5.	At paragraph 15 of the judgment, the trial Court judge set out the sums paid by the State between 17th December 2004 and 11th February 2010.  They are set out in what was referred to as Table 4 as follow: 

Date	   Amount	
17/12/2004	    73,417.12	
11/02/2005	  645,708.98	
  2/03/2005	  354,291.02	
28/09/2005	        92,202.00	
18/11/2005	   1,400,000.00	
23/11/2005	      100,000.00	
  2/06/2006	      200,000.00	
  18/03/2009	   1,083,932.55	
  08/12/2009	   4,000,000.00	
  11/02/2010	      300,000.00	
Total To Date 	K8,249,551.67	

7.	Then at paragraph 49(v) of the judgment the trial Court judge concluded thus:

“Further, I find that all outstanding invoices have been paid in full as detailed in Table 4”.

8.	The total judgment sum the trial Court judge entered against the State was K3,349,338.69 comprising of K3,341,986.33 being an award of damages and K7,352.36 being an ward of 2% interest pursuant to the Judicial Proceedings (Interests on Debts and Damages) Act, 2015.  

Principles relevant to claim for interest

9.	The interest component which is the subject of this appeal is the one claimed pursuant to the contract (“contractual interest”) as opposed to the statutory interest claimed under Section 4 of the Judicial Proceedings (Interest on Debts and Damages) Act, 2015.  The former is claimed “as of right” and the latter, awarded at the discretion of the Court: see Cheong Supermarket Pty Ltd & Ors v. Bougainville Enterprises Pty Ltd [1987] PNGLR 24.

10.	At common law any payment made by the defaulting party to a contract where interest accrues on the principal is towards settlement of interest and not principal.  As Lord Cottenham explained in Bower v. Marris (1841) 41ER 525, a creditor cannot be made to apply payments towards discharge of part of the principal which bears interest, and thereby leave interest due, which does not bear interest.  In other words, interest is settled first before the principal.     

11.	As to pleading and proof, the party must make a claim for it in the writ and statement of claim and secondly, adduce evidence demonstrating how it is entitled to it and how much is outstanding and due.  In terms of pleadings, it is sufficient to plead that interest is claimed under an agreement to pay and state the relevant clause(s) of the agreement referring to interest in the statement of claim, to draw the opposing party to its contractual basis. The clause(s) will set out the method of calculation of interest such as rate of interest, source of interest rate (if any) and period for which interest can run.  At trial, evidence should be adduced to prove these matters and significantly, the amount outstanding and due.

Appeal

12.	Guided by these principles, we refer again to [3] and [4] (supra) and note that there is no contest that the appellant had pleaded that it satisfactorily provided services to the State in accordance with the terms of the contract and issued various invoices for payment in the sum of K11,251,270.34.  The State paid only K2,865,615.12 but, in breach of the contract, failed to pay the balance of K8,385,651.22. This was the reason it claimed the said balance, alternatively, damages for breach of contract, interest and costs.

Contractual Interest and Statutory Interest

13.	The State opposes the appeal by referring to the case of Cheong Supermarket Pty Ltd & Ors (supra) and submits that the appellant is not entitled to both sets of interest because it was awarded 2% interest in the sum of K7,352.36 under statute.  This sum was awarded to compensate the appellant for being kept out of money while the principal remained unpaid.

14.	However, we refer to the difference between interest claimed under contract and interest claimed under statute at [9] (supra) and emphasise that interest claimed in this case is being claimed pursuant to contract, thus, as of right, and it is open to the appellant to make a claim for it in the writ.  We add that the trial Court judge was not in doubt about the difference between the two when the following was recorded at paragraph 54(vii) of the reasons for judgement:

“However, I propose to consider a claim for interest on delayed payments which is a term of the contract and the basis for this cause of action.  I find that a claim for interest for delayed payment of invoices rendered for payment under Clause 31(h) and paid in accordance with Part II of the Contract is available to the plaintiff”.

15.	We are satisfied that the appellant was entitled to make a claim for contractual interest and the State’s contention to the contrary will be dismissed as having no merit.  

Pleadings on claim for interest

16.	The second ground the State relies on to oppose the appeal is on procedural fairness.  It argues that it was unfairly denied a right to defend the claim for interest because the appellant did not set out the details of the claim for interest in the statement of claim.  This assertion is not entirely correct because based on what we have highlighted at [11] (supra) we are able to ascertain at paragraph 10 of the statement of claim that the appellant’s claim was based on Clause 31(h) of the Contract.  Paragraph 10 states:

“By reasons (sic) of non-payment of the outstanding sum of money to the Plaintiff, the Defendant has breached the terms and conditions of Clause 31(h) of the Contract”.

17.	A defendant reading the above statement will be drawn to Clause 31(h) of the Contract to ascertain the details of the breach of the terms and conditions.  Clause 31(h) states “......... Any sums remaining unpaid at the expiry of such period of sixty days shall bear interest thereafter, such interest to accrue from day to day at the rates detailed in Part II (Section C)”.
	
18.	From the details supplied by Clause 31(h), it will not be difficult to find that where the principal remains unpaid after 60 days, interest will accrue at a daily rate as set out in Part II (Section C).  Turn to Part II (Section C) of the Contract and it will be noted that the agreed compensation for overdue payment is the “lowest overdraft value of interest charged by the Consultants Bank in Papua New Guinea”.  

19.	Based on the reference to “lowest overdraft value of interest.......” it is quite clear that parties had contemplated at the time of signing of the contract that interest rate will fluctuate and it would not be possible to stipulate a fixed rate to compute interest on any unpaid sum of the principal.  That is why they opted to apply the “lowest overdraft value of interest” charged by the appellant’s bank in PNG.  

20.	In our view, the statement at paragraph 10 (supra) and stipulation at Clause 13(h) of the Contract gives the State sufficient information in relation to the basis of the claim for interest.  To further assist the State, the appellant has set out, in table form, the outstanding invoices and sums claimed including interest.  This information can be seen at paragraph 9(b) of the statement of claim.  For these reasons, we are not satisfied that the State was denied a fair hearing and decline to dismiss the appeal and will consider it on its merits.

Proof of Claim for Interest

21.	A defaulting party’s contractual liability where interest accrues on the principal is dependable on whether any sum paid is towards settling the principal or interest.  This issue is pivotal to this appeal.  First, we were not invited by the State to find that the payment of monies by a defaulting party to pay off the interest accrued on the principal sum is tantamount to unjust enrichment.  For this reason, it does not require our consideration.

22.	Second, we were not urged to find that this three century old principle established by Lord Cottenham in 1841 in Bower v. Marris (supra) is inappropriate to the circumstances of Papua New Guinea and should not be applied by the Court in this case.  We are then left with the appellant’s submission that any payment made by the defaulting party must be towards settlement of the interest component and not the principal. We accept this submission. We add that although Bower v. Marris (supra) was a bankruptcy estate claim case, the principle appears to be well established in commercial practice, moreover between contracting parties, such as, in this case, to compensate a claimant for being kept out of his money. 

23.	In terms of proof, the evidence adduced by the appellant at trial comprised of five affidavits of Mr. Flynn which were tendered without objection and he was not cross-examined on any of them or at all.  It must be the case then that the evidence of Mr. Flynn was uncontested and can be summarised as follows; Mr. Flynn was a civil engineer and project manager by profession.  He produced the Project Management Consultancy Agreement and there were various Variations requested to the contract, mobilisation payments arose pursuant to the contract and payments fell due for delay.  In his oral evidence he provided all of the appellant’s documents to Dr. Goldsmith.  The lowest overdraft interest rate charged by the appellant’s bank, BSP Bank was 13.2%.

24.	 As to the evidence of Dr. Goldsmith, we note that he was initially one of two experts appointed by Court order to undertake a technical audit and value the work undertaken by the appellant.  Dr. Goldsmith’s affidavit which contained his audit report and two Appendices C and B, were tendered.  He had extensive experience inter alia in providing expert assessments and evidence.  His audit report provided an assessment of the appellant’s claim.

25.	From his oral evidence, we further note that he prepared the report pursuant to the Court order. He spent two weeks in Port Moresby in an office going through every file and invoice and acted independently.  He also had no dialogue with the appellant at all.  He confirmed in cross-examination that he prepared an independent assessment, based on his own judgment of the information provided to him and from that, he was able to determine if works the appellant claimed for had been carried out.  

26.	Significantly, we note that Dr. Goldsmith examined and verified every claim and this included payments received by the appellant.  Every payments received from the State were deducted from the appellant’s claim.  He corrected some errors he found in the typing, arithmetic, in his report, in Appendices C and B.  

27.	The amount outstanding and due to the appellant was K8,251,290.26.  Appendix B was what he found to be the appellant’s claim with interest.  He used the contractually-mandated lowest overdraft interest rate which was 13.2%.  The calculation was to 14th June 2017.  

28.	We are satisfied that Dr. Goldsmith’s evidence was not shaken in cross-examination to raise any doubt as to its credibility, in addition, to there being no evidence offered by the State to contradict or deny what he has deposed to in his affidavit.  For these reasons, we accept the submissions of the appellant that there was no reason for the trial judge not to accept his evidence.  This is where we are unable to agree with the trial Court judge that first, the appellant did not introduce evidence “as to the methodology of calculating this interest on overdue payment”.  Second, we do not agree that “[n]o evidence was adduced during trial as to what is the lowest overdraft value of interest charged by the Consultant’s bank”.

Assessment of Claim for Interest

29.	Finally, we accept the appellant’s submissions in relation to the calculation of the appellant’s claim based on that evidence. By purporting to apply the State’s payments against principal, the trial Court judge concluded that the appellant’s “claims” had been paid.  In so doing, the Court overlooked Dr. Goldsmith’s report, which the State had not previously queried or questioned.  The Court ignored the timing of the payments, and the manner of their appropriation by the appellant.  Instead the Court wrongly credited all the payments made by the State against the principal sums in the invoices.

30.	The appellant submits that the trial Court judge wrongly concluded that amounts contained in the invoices referred to in the statement of claim had been settled by 8th February 2010.  We accept this submission because applying the principle in Bower v. Marris (supra) the truth is that, they had not been settled.  

31.	The evidence adduced by the appellant “as to the methodology of calculating this interest on overdue payment” referred to by the trial Court judge at paragraph 23 bullet point no. 4 of the reasons for judgment is the one correctly identified by the trial Court judge at paragraph 23 bullet point 6 as Appendix C – “Interest and Claim Value”.  Appendix C may be found in the affidavit of Dr. Goldsmith (exhibit “P7”).  

32.	Appendix C is quite detail.  It sets out the claim numbers and dates, interest start date, interest rate %, claim amount and amount due.  We wish to highlight three significant matters which go to support the appellant’s claim.  First, interest is charged 60 days after the due date for payment.  In this case, it will be noted that the first claim of K736,340.22 was due on 7th April 2003.  After 60 days, interest started to run and charged from 7th June 2003.  The second matter is that, interest rate varied between 13.5% and 8.95%.  This is consistent with the agreement between the parties which we have pointed out earlier at [19] (supra). The final matter is that, the sum identified in Appendix C as outstanding as at 30th April 2011 is K8,348,749.04.  
  
33.	It follows that the finding by the trial Court judge that “all outstanding invoices have been paid in full as detailed in Table 4” is unsupported, and contrary to the evidence in Appendix C and must be set aside.  In lieu of that, there will be a judgment in favour of the appellant in the sum of K8,348,749.04.   

Contractual Interest post writ period

34.	The final aspect of the appeal is in relation to whether contractual interest runs and should be awarded post writ up to date of final judgment. The appellant claimed interest from the date of issue of writ to the date of trial of 14th June 2017.  At paragraph 54(vii) of the reasons for judgement, the trial Court judge held that the appellant’s claim was misconceived.  The judge formed a view that, after entry of default judgment “any claim thereafter would be considered a judgment debt”.  

35.	The appellant submits that the trial Court judge erred because there was no judgment debt at or from the date of issue of writ to the date of judgment on assessment of damages.  It was only after the judgment on damages was entered that the appellant is entitled to interest on the judgment debt.  We accept this submission and add that the entry of default judgment on 4th June 2008 only resolved the issue of liability.  Moreover, interest on the judgment debt may be claimed and awarded pursuant to the Judicial Proceedings (Interest on Debts and Damages) Act.

36.	In this case, the writ was issued on 18th December 2007.  As an award has been made for payment of contractual interest up to 30th April 2011, there will be a judgement for contractual interest from 1st May 2011 to date of judgment on damages of 18th June 2018.  However, we are of the view that the evidence of Dr. Goldsmith fell short of establishing the total outstanding sum for this period of time because he did not produce a schedule of outstanding interest accrued on the principal sum to verify his oral evidence.  We have decided to remit this aspect of the claim to the National Court for retrial before another judge on a date and time to be fixed.

Statutory Interest

37.	The trial Court judge awarded 2% interest in the sum of K7,352.36 pursuant to statute.  This sum was arrived at based on the total amount of damages of K3,341,986.33 and period between date of trial of 5th July 2017 (actual date of final submission) and date of judgement on damages of 18th June 2018.  We agree with the trial Court judge in awarding statutory interest but we would order that it will be calculated based on the new total judgment sum of K8,348,749.04 at the rate of 2% and from the date of judgment on damages of 18th June 2018 until final settlement.  As it is not known when the State will settle in full, the judgment sum, we will leave it open to the appellant and respondent to work out the final sum due and payable.

Order 

38.	The orders of the Court are:

1.	The appeal is upheld.

2.	The decision of the National Court of 18th June 2018 is quashed.

3.	Judgment is entered against the respondent in the sum of K8,348,749.04. 

4.	The claim for contractual interest from 1st May 2011 to date of judgment on damages of 18th June 2018 is remitted to the National Court for retrial before another judge on a date and time to be fixed.

5.	The respondent shall pay 2% interest on the judgment sum of K8,348,749.04 from the date of judgment on damages of 18th June 2018 until final settlement.  

6.	The respondent shall pay the costs of the appeal, to be taxed, if not agreed.

Judgment and orders accordingly.
________________________________________________________________
Ashurst Lawyers:			Lawyers for Appellant
Solicitor General:			Lawyers for Respondent